The restriction covers NASA, the National Science Foundation and the Commerce and Justice departments.
U.S. lawmakers have expressed concern that the Chinese government could use the equipment of Chinese businesses to tap into U.S. communications networks and spy on people in the United States. They have also accused the Chinese military of hacking into U.S. businesses to steal trade secrets.
In their letter, the industry groups said they share lawmakers' concern about IT security, but that "geographic-based" restrictions are ineffective and promote a false sense of security.
"At a time when greater global cooperation and collaboration is essential to improve cybersecurity, geographic-based restrictions in any form risk undermining the advancement of global best practices and standards on cybersecurity," they wrote.
They warned that the new requirement could hamper the ability of agencies to buy new IT products and could prompt China or other countries to adopt their own restrictions targeting U.S. companies.
The groups noted that the provision, Section 516, was included at the last minute in the funding legislation and was not subject to hearings or markups.
"Section 516 creates challenges that could undermine U.S.-based companies’ global competitiveness," they wrote.